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Infant Industry Argument Definition
Let's quickly review trade policies before diving into the infant industry argument definition. We know that trade policies are a collection of guidelines and agreements created by governments to facilitate equitable trade with other nations. The country's economic situation affects how trade policy is formulated. A developing nation may have a different trade policy than a developed nation. Ultimately, the basic objective of a trade policy of any country is to promote economic growth.
The government creates a set of rules and agreements known as trade policies to ensure balanced trade with other nations.
Since the beginning of the 20th century, the viewpoint on economic progress has developed. Following World War II, trade policies were developed under the assumption that protecting domestic manufacturers against imports was the fundamental factor to foster economic growth. The government used import quotas and higher import tariffs to shield specific industries from outside competition. As a result, the imported goods became expensive, enabling domestic goods to foster at a cheaper rate into the market. This type of policy formulated by the government is known as an import-substituting policy.
A widely used policy by underdeveloped countries which involves restricting imports and promoting domestic production to reduce their dependence on industrialized nations is known as the import substitution policy.
Now, let us directly jump into the infant industry argument definition.
The infant industry argument is an argument based on an import substitution strategy used to defend new domestic industries against international competitors. The government must take an active role in protecting domestic manufacturers from foreign competition by fostering favorable conditions for new sectors to grow. Some nations employ high import tariffs and import quotas as the first step in the industrialization process.
The infant industry argument is based on an import substitution strategy that aims to safeguard new domestic sectors from international competition.
To learn more about trade policies and import-substituting industrialization, why not check out our following articles:- Trade Policy- Import-Substituting Industrialization
Infant Industry Theory
Now, let's get straight into the infant industry theory.
The infant industry theory is one of the most important theories of import-substituting industrialization. It argues that the infant industries of developing countries have a comparative advantage in manufacturing but are unable to compete with the well-established manufacturing industries of developed countries.
For the protection of manufacturing industries, the government formulates policies that help the infant industries foster without having much competition. The government will try to impose import quotas, put high tariffs on imports, and provide subsidies.
The following factors are considered by the government to protect the infant industries.
1. High tariffs on imports: By imposing high tariffs on imports, foreign products become expensive which will help the domestic manufacturers if they can produce the similar product at a lower cost. Low costs will attract consumers and in turn, help the industry grow.
2. Providing subsidies: The government typically provides subsidies in the form of cash and certain situations, tax reductions. This helps to assist existing infant industries while also encouraging new businesses to enter the market.
3. Import quotas: By allocating quotas to imports, the government limits the number of imported goods in the country. As a limited amount of goods are not able to fulfill the demand of the market, domestic industries get a chance to gain a greater share of the market.
Fig. 1 - Infant Industry Theory
Figure 1 depicts the economy where import quotas have been employed. Initially, when there is no import quota, the supply is at S1 and the import ranged from Q1 to Q4 (covering portions X, Y, and Z) at price level P. This gives less room for domestic manufacturers as the demand is being covered by imported goods.
Now, after the quota has been imposed, import is restricted down to the range of Q2 to Q3 covering portion Y) and increases the price to P1, which gives domestic manufacturers more space to capture the market and earn a substantial profit. This is how government can impose import quotas and help infant industries grow.
To learn more, why not check out our other articles:- Export Subsidies- Import Quotas- Tariffs
Infant Industry Argument Example
Now, let us look at the infant industry argument example.
Let us assume Country A is importing sugar from Country B for a very long time and has not been able to develop its domestic sugar industries. Even though Country A was rich in sugarcane production and could have had a competitive advantage in sugar manufacturing, they were unable to leverage its strength. Slowly, Country A's government understood its comparative advantage in sugar manufacturing and decided to protect its infant companies that were producing sugar.
Country A's government decides to manufacture sugar on its territory by imposing high tariffs on imports, quotas on imports, and subsidies to sugar manufacturers to protect its infant industries and attract new manufacturers to join the sugar production industry. Domestic industries were substantially encouraged once these regulations were implemented since they were able to acquire a larger market share and generate substantial profits.
Infant Industry Argument for Protectionism
Now, let's dive deep into the infant industry argument for protectionism.
Going beyond government protection, sometimes other measures must also be taken to protect the infant industries. Two other arguments to protect the infant industries are:
- Building strong capital markets
- Appropriability argument
Infant Industry Argument for Protectionism: Building Strong Capital Markets
Building strong capital markets is one of the methods to protect the infant industry. A lack of proper financial institutions can limit the ability of the industry to grow and restrict its profits. For example, if there is no proper financial institution (bank), then it will be hard to facilitate the investment for the new industries (infant manufacturing industries) to operate and sustain seamlessly. Hence, to make sure the infant industries are not only protected but are supported at the same time, building strong capital markets is necessary.
Infant Industry Argument for Protectionism: Appropriability Argument
The appropriability argument is based on the fact that new industries don't always have the first-mover advantage in business. They might have to incur startup costs which other follower companies might not have to incur with the knowledge they get by following the innovator company. As a result, the profits will not be as much as expected for the innovator. Due to this fear, innovators are hesitant to enter the new industry. Hence, proper policies must be formulated to compensate for such industries and encourage others to enter the market.
The inability of the innovator to maximize profits on their innovation is known as the appropriability problem.
What to learn more about Protectionism? Why not check out our article:- Protectionism
Infant Industry Argument Pros and Cons
Now, let us learn about the infant industry argument pros and cons to comprehensively understand the concept.
There are several advantages of the infant industry argument in a particular industry. If a government tries to adopt the infant industry argument concept then it will be able to protect its domestic industries from foreign competition by imposing high tariffs and import quotas. It further helps the economy to be independent and creates various job opportunities in the market. Ultimately, the nation can expect economic development by employing the infant industry argument.
Along with the advantages, there are several disadvantages of the infant industry argument. As the trade restrictions such as import quotas and high tariffs are imposed, it might affect the exports of other countries from which they were importing, hindering trade relations with the possibility of eventually leading to a trade war. Likewise, due to the lack of competition, the infant industries might become inefficient which can harm the economy. Lastly, sometimes the cost of manufacturing can be greater than the cost of importing. This can harm the economy, so proper assessment must be done before employing such economic decisions.
You have studied till the end of this article. Great Job! Why not continue reading our following articles:
- Trade Liberalization- Free Trade and Efficiency- Collective Action- The Uruguay Round
Infant Industry Argument - Key Takeaways
- The government creates a set of rules and agreements known as trade policies to ensure balanced trade with other nations.
- A widely used policy by underdeveloped countries which involves restricting imports and promoting domestic production to reduce their dependence on industrialized nations is known as the import substitution policy.
- The infant industry argument is based on an import substitution strategy that aims to safeguard new domestic sectors from international competition.
- The government will try to impose import quotas, put high tariffs on imports, and provide subsidies to protect the infant industries.
- The inability of the innovator to maximize profits on their innovation is known as the appropriability problem.
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Frequently Asked Questions about Infant Industry Argument
What is the main argument of the infant industry theory?
The main argument of the infant industry theory is government should impose import quotas, put high tariffs on imports, and provide subsidies to protect domestic industries from foreign competition.
What are the benefits of the infant industry argument?
The main benefits of the infant industry argument are that it makes an economy self-reliant and reduces dependencies on other countries.
What is meant by the infant industry argument?
The infant industry argument is the economic argument that argues that government should impose import quotas, put high tariffs on imports, and provide subsidies to protect domestic industries from foreign competition.
What are the advantages and disadvantages of protecting an infant industry?
The advantage of protecting the infant industry is that it reduces foreign dependency and makes the economy self-reliant, whereas, the disadvantage is that it might hinder trade relations with foreign countries.
Which is a valid counterargument to the infant industry argument for protective tariffs?
The valid counterargument to the infant industry argument for protective tariffs is that it might affect the exports of other countries from which they were importing, hindering trade relations with the possibility of eventually leading to a trade war.
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